Welcome to Part 4 of the Pitch Deck Mistakes series.
In Part 1, we covered how long your deck should be; in Part 2, we discussed how to present the problem slide; and Part 3 dissected how to presenting your business in the most compelling way possible.
But even if all three of those elements are top-notch, there’s a chance that VCs won’t move forward with you.
Here's why: investing is a risky business. Roughly 9/10 startups won't succeed.
That leaves one company to cover all costs AND bring in meaningful dollars in order for the firm to thrive.
Generally speaking, investors are looking for that one big winner to provide a 100x return.
So, in order to keep the business running – and to invest in more companies – VCs aren’t just looking for businesses that can survive. They’re looking for the next Instagram.
Now, a 100x return is extremely tough to accomplish. Investors know this... and they know that the companies with the best shot of winning are extremely scaleable.
So… what makes a business scalable?
Well... a lot of things. But since you can't spend your whole day reading this email, we'll focus on three things:
Unit Economics
Customer Acquisition
Exponential Growth
Let’s take them one at a time, shall we?
1. Unit Economics
Unit economics refers to the cost of acquiring and onboarding a customer compared to how much money you make from that customer.
Obviously, it’s important that the revenue you’re earning from a new customer is higher than whatever it costs to acquire and serve them.
But also important are the numbers themselves.
For example, an e-commerce company might make an average of $35 per order. And with 100 orders a day, that’s over $100k in revenue each month.
Sounds pretty good, right?
Here’s the problem: the cost to acquire each customer could be $10. Then add in the cost of the product ($15), packaging ($3), shipping ($4)... and suddenly that $35 per order isn’t so impressive.
And if your customer decides to return their purchase, suddenly you’re not just breaking even… you’re losing money.
Now, there are plenty of successful e-commerce companies. But it’s unlikely that they’ve received VC funding. That’s because the unit economics are so tough.
2. Customer Acquisition
As an early stage company, you might not yet have many (or any) customers yet. And that’s ok.
But customer acquisition is one of the most important elements of your business. And your deck should address it.
The best decks we see include two pieces of customer acquisition tactics.
A) A variety of marketing channels... for example:
Webinars
Free assessments
Referral program
B) Early results of their experiments... for example:
Webinars: 150 signups, 20% conversion
Free assessments: 100 signups, 10% conversion
Referral program: 20% increase in leads in 90 days
You don't need to have many, many different channels.
Investors want to see that you have experimented with a few channels, and have found one or two that you can optimize and invest in.
3. Exponential Growth
There are two ways your company can grow: linearly, or exponentially.
Linear growth means that your costs increase relative to every new customer you bring on.
Imagine I’m selling sunglasses. For every new customer I convert, I have to pay for the sunglasses, the box, packing labels, the cost to ship, and the labor to make it all happen.
These costs will be the same if I have 1 customer or 100.
So my growth would look something like this:
Exponential growth means that my revenue is increasing at a faster rate than I’m incurring costs.
Let’s say I built a marketing automation tool. I’m charging my customers $60/month.
Now, I will have recurring costs to keep the platform running (engineers, software fees, etc). But those expenses won't change if I have 1 customer or 100.
Meanwhile, my revenue from 1 customer will look a lot different compared to 100 customers.
So my growth might look like this:
Real Life Examples Of Why This Stuff Matters
A company that’s growing linearly can still be wildly successful. MVMT, an e-commerce watch company, earned $71m in revenue in 2017.
They were acquired for about 1.4x their annual revenue. And that's a lovely payout for their founders, who bootstrapped the company.
But if they had any investors, those investors would not have seen a big return.
On the other hand, Honey (a browser extension that helps users find discounts) was acquired for $4b… a 40x return.
Think about that: 1.4x versus 40x.
So, why did these two companies see such variation in their exits?
MVMT has fixed costs that increase proportionally to their growth. And once they get a customer, they have to continue to spend on marketing to get any additional value (revenue) from that customer.
On the other hand, Honey has very low fixed costs, and are able to monetize their customers over and over again by becoming part of their online shopping habits.
But what does it all mean, Basil?
Investors are looking for companies that can see the kind of exit that Honey saw.
And to be the next Honey, your pitch deck should show that you have the tools in place to scale your business.
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And be sure to check out the other parts of the Pitch Deck Mistake series:
